Merger with Bank of Saurashtra
SBI has decided to merge State Bank of Saurashtra: The State Bank of India (SBI), the country's largest commercial bank, has kicked off the consolidation process with its associate banks. It has decided to merge the State Bank of Saurashtra (SBS), an unlisted wholly owned associate bank, with itself. The boards of both the banks have given an in-principle approval to the merger proposal. The SBI will now have to get approvals from the Government (which holds 59.7% stake in SBI) and the Reserve Bank of India. We feel the SBI chose the SBS to begin the consolidation process, as the SBS is the smallest among the SBI's subsidiary banks and due to the ease of getting the regulatory approvals as the SBS is completely owned by the SBI.
First signs that SBI is serious in restructuring its subsidiaries: The SBI-SBS merger has been lingering around for many years without any concrete action on the ground. The merger process was slowed down mainly due to political hindrances and regulatory hurdles. However this time things are really looking bright as the formation of a holding company is in the pipeline and the merger process is already initiated. SBI management making things move on the ground The management's intent is now visible with things actually moving on the ground. Investors are generally skeptical about the success of organisational changes like mergers and acquisitions in public sector companies due to various bottlenecks and red tapism resulting in failure of value unlocking in the majority of cases. We see this merger as a stepping-stone to be followed by the merger of other unlisted and listed associate banks.
Unlocking value for investors
We expect the SBI to unlock value for its investors from its various subsidiaries by adopting the merger process (mainly for its associate banks due to the synergies in the banking business) and monetising its stake in other SBI has decided to merge State Bank of Saurashtra: The State Bank of India (SBI), the country's largest commercial bank, has kicked off the consolidation process with its associate banks. It has decided to merge the State Bank of Saurashtra (SBS), an unlisted wholly owned associate bank, with itself. The boards of both the banks have given an in-principle approval to the merger proposal. The SBI will now have to get approvals from the Government (which holds 59.7% stake in SBI) and the Reserve Bank of India. We feel the SBI chose the SBS to begin the consolidation process, as the SBS is the smallest among the SBI's subsidiary banks and due to the ease of getting the regulatory approvals as the SBS is completely owned by the SBI. w First signs that SBI is serious in restructuring its subsidiaries: The SBI-SBS merger has been lingering around for many years without any concrete action on the ground. The merger process was slowed down mainly due to political hindrances and regulatory hurdles. However this time things are really looking bright as the formation of a holding company is in the pipeline and the merger process is already initiated. SBI management making things move on the ground The management's intent is now visible with things actually moving on the ground. Investors are generally skeptical about the success of organisational changes like mergers and acquisitions in public sector companies due to various bottlenecks and red tapism resulting in failure of value unlocking in the majority of cases. We see this merger as a stepping-stone to be followed by the merger of other unlisted and listed associate banks. We expect the SBI to unlock value for its investors from its various subsidiaries by adopting the merger process (mainly for its associate banks due to the synergies in the banking business) and monetising its stake in other.
Valuations remain attractive
The organisational changes (like the merger with associates and formation of the holding company), regulatory policy changes (a possibility of introduction of new capital raising instruments like non-voting shares or guidelines on preference shares) and fundamental improvement in the core business prospects remain the likely triggers going forward, which makes the SBI our top pick among the public sector banks. At the current market price of Rs1,556, the stock is quoting at 14.2x its FY2009E earnings, 5.8X pre provision profits, 1.9x stand alone and 1.5x consolidated FY2009E book value. We maintain our Buy recommendation on the stock with a price target of Rs 1780.
SBI has decided to merge State Bank of Saurashtra: The State Bank of India (SBI), the country's largest commercial bank, has kicked off the consolidation process with its associate banks. It has decided to merge the State Bank of Saurashtra (SBS), an unlisted wholly owned associate bank, with itself. The boards of both the banks have given an in-principle approval to the merger proposal. The SBI will now have to get approvals from the Government (which holds 59.7% stake in SBI) and the Reserve Bank of India. We feel the SBI chose the SBS to begin the consolidation process, as the SBS is the smallest among the SBI's subsidiary banks and due to the ease of getting the regulatory approvals as the SBS is completely owned by the SBI.
First signs that SBI is serious in restructuring its subsidiaries: The SBI-SBS merger has been lingering around for many years without any concrete action on the ground. The merger process was slowed down mainly due to political hindrances and regulatory hurdles. However this time things are really looking bright as the formation of a holding company is in the pipeline and the merger process is already initiated. SBI management making things move on the ground The management's intent is now visible with things actually moving on the ground. Investors are generally skeptical about the success of organisational changes like mergers and acquisitions in public sector companies due to various bottlenecks and red tapism resulting in failure of value unlocking in the majority of cases. We see this merger as a stepping-stone to be followed by the merger of other unlisted and listed associate banks.
Unlocking value for investors
We expect the SBI to unlock value for its investors from its various subsidiaries by adopting the merger process (mainly for its associate banks due to the synergies in the banking business) and monetising its stake in other SBI has decided to merge State Bank of Saurashtra: The State Bank of India (SBI), the country's largest commercial bank, has kicked off the consolidation process with its associate banks. It has decided to merge the State Bank of Saurashtra (SBS), an unlisted wholly owned associate bank, with itself. The boards of both the banks have given an in-principle approval to the merger proposal. The SBI will now have to get approvals from the Government (which holds 59.7% stake in SBI) and the Reserve Bank of India. We feel the SBI chose the SBS to begin the consolidation process, as the SBS is the smallest among the SBI's subsidiary banks and due to the ease of getting the regulatory approvals as the SBS is completely owned by the SBI. w First signs that SBI is serious in restructuring its subsidiaries: The SBI-SBS merger has been lingering around for many years without any concrete action on the ground. The merger process was slowed down mainly due to political hindrances and regulatory hurdles. However this time things are really looking bright as the formation of a holding company is in the pipeline and the merger process is already initiated. SBI management making things move on the ground The management's intent is now visible with things actually moving on the ground. Investors are generally skeptical about the success of organisational changes like mergers and acquisitions in public sector companies due to various bottlenecks and red tapism resulting in failure of value unlocking in the majority of cases. We see this merger as a stepping-stone to be followed by the merger of other unlisted and listed associate banks. We expect the SBI to unlock value for its investors from its various subsidiaries by adopting the merger process (mainly for its associate banks due to the synergies in the banking business) and monetising its stake in other.
Valuations remain attractive
The organisational changes (like the merger with associates and formation of the holding company), regulatory policy changes (a possibility of introduction of new capital raising instruments like non-voting shares or guidelines on preference shares) and fundamental improvement in the core business prospects remain the likely triggers going forward, which makes the SBI our top pick among the public sector banks. At the current market price of Rs1,556, the stock is quoting at 14.2x its FY2009E earnings, 5.8X pre provision profits, 1.9x stand alone and 1.5x consolidated FY2009E book value. We maintain our Buy recommendation on the stock with a price target of Rs 1780.
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